Thursday, 18 June 2015

A The banks have lent money to the government. If the state defaults, banks will be unable to fully repay depositors. Money has been flooding out of the banks for months on fears this could happen.

They now have so little cash in reserve, that for every euro withdrawn, they must borrow an extra euro in reserves from the Bank of Greece, if allowed by the European Central Bank (ECB). If this emergency lending is removed, cash withdrawals and cross-border transactions would be limited.

So the government has to lend to bank so that banks can lend to the government? This is Emperor's New Clothes territory.

If the banks were taken out of the loop entirely, what we have is individuals lending directly to the government i.e. the government acting as its own bank, and people making deposits with it.

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The deposit holders would still be left wondering about The governments abilaty to honour the deposits.The deposit flight by Greek citizens leaves the coutries where the deposits end up exposed to Greeces financial system. Its a particular mechanism of the eurosytem, the liabilaties leave Greece but the assets stay in the Greek banking system. Its a particular mechanism of the Eurosystem, which is a lot different the the UK system, where bank transactions are completed in final settlement at the BoE.

The problem is as ever and always that the Government cannot create money but must allow the banks to create it and borrow off them.The longest most lethal con in history. The Sovereign Money movement is on the case particularly in Iceland but we do not have only zombie banks ,we have zombie bank customers who were ensnared into zombiedom when trying to buy a house.The OECD is beginning to catch up with us. In Guardian Thursday p27 "The OECD analysis,launched in a speech by its chief economist, Catherine L. Mann, in London yesterday, discovered that large banking sectors ,underpinned by the expectation of being bailed out by their governments, tend to lend too much.In particular, they pump excessive credit to households ,inflating unsustainable bubbles in housing and other assets ,but do not invest enough in viable and growing companies , which are better at creating growth". And ?? Very neatly put but what's the answer, lady?

DBC Reed, this is not true. I suggest you read this critique of the SM proposals:http://www.3spoken.co.uk/2014/11/the-sovereign-money-illusion.html?m=0Government spending works by asking the central bank to credit the reserve account of a bank, which then credits a deposit.

"problem is as ever and always that the Government cannot create money but must allow the banks to create it and borrow off them.The longest most lethal con in history."Not it doesn't. Government spending creates money. Government is like a bank overall. Government spending is forced private money creation.The borrowing happens after under a currency issuing government.Issuing bonds is an entirely politicial choice, except in the eurozone where OMF is banned.

the BoE website is quite transparent on this subject.It was a subject of discussion on the web 10 years ago but now the BoE has spelt out the particilars of the mechanism it is no longer an issue of how the monetery system works.

Yes,Dinero is right. The BoE spilled the beans in that bulletin in early 2014. But there are thousands of laissez faire diehards holed up in the hills like Japanese soldiers refusing to accept that their side has caved in.The question is why did the BoE come clean all of a sudden?They weren't under any pressure.Perhaps they foresaw or sought to encourage something like the Sovereign Money movement in Iceland and elsewhere. Martin Wolf, a bit of a bellwether, wrote "Strip private banks of their power to create money "for FT on 24.iv.14 e.g. "A maximum response would be to give the state a monopoly on money creation" the advantage for us being that the state could do its duty by preventing too much money being pumped into residential land (ultimately).Another advantage would be that the state could create money for infrastructure and the public sector ,so LVT wouldn't have to collect so much money at present invested in land.A from-here-on LVT would suffice acting as little more than a tax on land value inflation which is however the ultimate economic evil.Martin Wolf proposes this too.

DBC Reed, I am glad that the Sovereign Money people are getting this issue into the public debate.The SM/Positive Money all focus on the liabilities side but you need to narrow the banks and focus on the assets side. Ban collateral-based lending because it prevents asset price bubbles (land.)The MMT and Georgist proposals have always seen more sensible to me than the Positive Money group, who seem to be a political group that have never been involved in banking and don't really understand it.

@Random (!)I think you need to pick apart the BoE statements in "Money Creation in the Modern Economy" to make your criticisms stick.The Overview at the beginning is short enough to nail down (if you can)on a format as brief as this.

AT RANDOM,I have ,I think, found the website you are referring to which includes some fairly standard explanations e.g." Once government transactions are eliminated , the scheme[QE] represents an exchange of gilts (liabilities of the National Loans Fund) for central bank reserves liabilities of the Bank of England "But there is a mind-blower in the comments underneath in which somebody appears to be suggesting that " National debt....is the accumulated tax credits not yet used to pay taxes." As you have had longer to mull this site over, perhaps you can unpack the full range of significances of this concept ,which I have never come across before

Dinero, government spending works by crediting bank accounts and debiting the government's account of the BoE. Yes, deposits get increased but so do reserves. That's why when they don't drain spending with bond issues it ends up as excess reserves or cash.The government issues bonds to allow the central bank to hit its interest rate target.

D, governments do go out of their way to try to make it look like they have to 'finance' spending. It is all smoke and mirrors. Nobody can bounce a government cheque.DBC Reed, all I can say is keep reading the articles, it is a very interesting site.

http://www.3spoken.co.uk/2012/04/fixed-exchange-rate-system-at-heart-of.html?m=0I think this article comes to the crux of the issue. Government spending is functionally equivalent to a bank loan aka forced private sector money creation.You will notice in the eurozone you have effectively a three layered system of currency pegs rather than the two layers in most systems.It is effectively a shared currency, not a single currency. Not like the Fed.

"But there is a mind-blower in the comments underneath in which somebody appears to be suggesting that " National debt....is the accumulated tax credits not yet used to pay taxes." As you have had longer to mull this site over, perhaps you can unpack the full range of significances of this concept ,which I have never come across before"It's standard double entry accounting. "Taxpayer's equity" replaces "Shareholder's equity."Money is a tax credit. Taxes create demand for the currency (and fees, fines, etc) even more so under a LVT system. If I force you to pay me 100 ransoms by imposing a tax, this creates unemployment and forces you to work for me. Government spending always works by crediting bank accounts. It adds to private sector "savings" (note, savings is a word used differently, "net saving by the non-govt sector")Money is used for other things as well, but these uses are all subsidiary. It is used for buying things, others can write out their own IOUs in govt currency, etc.The owner of the site is usually quick to answer comments clearly. He is good at explaining the MMT point of view. I disagree with him on a few issues but he has always engaged with any concerns/criticisms. I would ask him the question you gave to me as he will be able to answer it far better than I can :)

Government spending does not increase reserves. Reserves shuttle back and fourth between the Governments BoE account and the commercial Bank's BoE accounts which is the mechanism of transfering funds between the deposit accounts of tax payers and the recipients of government spending.

At the consolidated level that disappears. The BoE is a subsidiary of the treasury.The government's BoE account doesn't really matter. It is just more BS and smoke and mirrors.It makes no sense to say the govt "gets reserves." It always has unlimited reserves. Unlimited money.The government can order the BoE to run an overdraft at the Ways and Means account.

Dinero, let's stay on the same page here.I am assuming just government spending. No bond issuance.We are trying to see the effects of govt spending (in isolation)With govt spending (or printing money, QE, whatever) you get excess reserves (and yes, assuming no cash withdrawl.) This drives the interbank rate down to the (natural, LOL) rate of 0. Government spending leads to excess reserves. Govt spending leads to excess reserves. Repeat until accepted as fact.That taxes and bonds change things afterwards and raise interest rates to the target level does not matter.

Government spends from its cash buffer. It gets some of it back as taxes. The rest it gets back when it issues bonds for reserves.

Spending only increases reserves in the commercial sector temporarily on an intra-day basis because the debt management office is constantly shuffling them back by issuing Gilts to refill the buffer.

So spending causes an increase in Gilt holdings - but only because of the institutional framework that is in place. You have a small amount of reserves that just bounces around the place as a buffer. What you really spend is Gilts.

This is just basic Treasury operations that you do with any financial institutions. Similarly in commercial banks they make loans and then backfill the funding by issuing bonds and shares or accepting deposits. But you know what your cash buffer has to target because loans take *weeks* to complete and in aggregate you know roughly how many will complete on average and therefore you can project your funding requirement really quite accurately for weeks in advance.

It's the same with government.

Ultimately all this talk is a lot of hot air. The control function that stops you spending as much as you want is the bank stopping your cheque. Nobody will stop a government cheque because they have neither the authority, nor the bottle to do so.

Ultimately if you believe that there is a wealth effect (and there is), and you accept bonds are wealth (which they are) then they will have an effect on increasing spending, not decreasing it!

But then neo-classicals are not beyond holding two contradictory notions at the same time."

Relatively small amounts of reserves shuttle back and fourth between the reserve accounts of commercial banks and the Treasury reserve accounts at the BoE to facilitate the actual transactions of tax and spending which occur between deposit accounts. Taxes are not paid in reserves , they are paid in deposits. Reserve movements are a mechanism of the the overall process of taxation and spending which takes place in deposit accounts. Government taxation, bond selling and government spending occurs between deposit accounts. Its is facilitated by the small amount of reserves shuttling back and fourth, but those reserves recirculate to facilitate a further transfer of funds between deposit accounts and so on to the next transaction. The actual transactions of the three things, taxing and spending and gilt issuance are taking place between deposit accounts. The flow is facilitated by the reciprocating reserve movements, however the stock of money is the deposit accounts which exist in great multitudes over and above the amount of reserves. The deposit accounts are the source of government taxation and spending. The deposit accounts are the stock from which government taxation and spending comes.

Din, you appear to imagine that "money" is a thing in an of itself, like water or cars or gold.

It is not.

Money is a unit of measurement, and what it measures it indebtedness. So nobody can have a financial asset (like a deposit in the bank) without somebody else having a financial liability (the bank owes you that money).

The thing to remember is money switching hands that drives things.Din, you say "taxes are not paid in reserves" and yet they are. If reserves are not transferred the tax is not paid/settled.And the government can ask the Bank of England to credit its deposit accounts as required. You can see e.g. platinum coins in the US.The government can also run overdrafts at the BoE. The government has minus quadrillion pounds. Oh no. But wait, there is overdrafts.Regardless, when us MMTers get in power we will run overdrafts at the Ways and Means account and all spending will come from there :D